Sippican Case

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Sippican Corporation
A manufacturer of hydraulic control devices – valves, pumps & flow controllers. Currently the company is undergoing a severe economic impact from price cutting in pumps one of its major product lines. This has led to decline in its profits in this line of business – (as illustrated below) | Sales | 1847500 | | | | Variable Expenses | 809000 | | | | Contribution | 1038500 | 56.21% | | | | | | | | Machine related expense | 334800 | | | | Setup Labour | 117000 | | | | Receiving & production control | 15600 | | | | Engineering | 78000 | | | | Packaging & Shipping | 109200 | | | | | | | | | Manufacturing Overhead | 654600 | 35.43% | | | | | | | | Gross Margin | 383900 | 20.78% | | | Other Expenses | 350000 | | | | Operating Income (pre-tax) ROS | 33900 | 1.83% | |

The company’s gross margin is expected to be 31% whereas as shown in the exhibit it is currently at 21%. Return on sales is 1.8% which is far below the target of 15-20% that the company has been realising in the past.
Sippican had recently raised the price of its flow controllers by more than 10% but yet failed to achieve any good financial results
It operates at a simple cost accounting system that directly charges each unit of product for its direct labour and material cost (exhibit 3) * Material cost is based on the prices paid for components under annual purchasing agreement * Labour rates are charged at 32.50 per hour and are charged to products on the basis of the standard run times for each product.
The company has only one producing department which machines & assembles components into finished goods. The cost system allocates the factory overhead cost to product as a percentage – this is currently at 185% (exhibit 2)
Sippican’s…...

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